Escalating Indo-US Trade War

Business Economics &Services Team (BEST)

                  Escalating Indo-US Trade War


Like the real war, the trade wars are also  an interplay of assertions, strategies, moves, counter moves, double talks and what have you. There are also trappings of deceit, conceit, arm twisting etc. in this game from both sides. But the powerful between the two wins the game. But unlike in the real war, there are no bloodshed, arms, weapons etc. In effect, it is a war of wits that can be won by a combination of factors like business acumen, foresightedness and the like.
The US has fought this war with Japan, EU, China and now with India. Sometimes, the trade wars can give strange results-a win-win situation or a lose-lose situation. Most of these wars follow a predictable trend and a goal-increased market access. Let us take stock of the current dimensions of the trade war between India and the US.
1. The pharmaceutical  sector. There are a number of areas ranging from patent protection, copy rights act, data protection, compulsory licensing, incremental innovation etc that have come to occupy the center stage in the US demand profile. The US Congress is putting pressure on Obama Administration to take steps against India and to keep India always in the radar for violation of trade related intellectual property rights. The latest is the forthcoming visit from the US a delegation  to , assess  how far India's pharmaceutical sector is complying with WTO norms. Basic to these assertions are that  the  US wants to have protection of intellectual property rights for a longer duration and better price for its pharma products in India. India is resisting the pressure by maintaining that whatever actions that it has taken are in compliance with the WTO rules. In a country, where there are a large number of poor people, India can ill-afford a runaway price  for its medicines. The present increase in the prices of medicines  has put the government in a mat, both from opposition and within the ruling coalition.

Telecom Sector: Not long ago, the US Vice President visited India. Among his top priority was to dissuade India from resorting to compulsory licensing or indigenization of the manufacturing  of telecom, which in policy apparatus is called phased manufacturing process. This was mainly about certain telecom equipment. The ban on imports of these items  imposed by the Indian government  was on account of the possible malware and spyware that can be built into the equipment. The US could succeed in partially getting the ban relaxed. A few days back, the US business body -US India Business Council -has represented to the office of the US Trade Representative (USTR) about the violation of  India on the WTO monitored International Telecom Agreement (ITA) by imposing customs duty on electronics products imported into India. They also complained that India is increasingly resorting to compulsory licensing of certain electronic items. The Indian counter was that the ITA was signed in 1997 and many electronic products have not come inot being after that cut off date. Naturally, the products which  are introduced  into the market after the cut off date will not be covered under the ITA, which stipulate that the imports should have only zero duty. Also, India's assertion is that the compulsory licensing is resorted only when the production of an item, be it electronics or pharma  product, is only when it was absolutely required as allowed under WTO. Also, the foreign  manufacturers/ importers   are  informed about the decision well in advance.

Double Taxation Avoidance Treaty (DTAT): The US has many complaints in this regard ranging from opaque nature of India's tax system, unpredictability of the system and on issues like retrospective tax, transfer pricing etc. Several rounds of discussions were held at both official and political levels. India' s has clear cut stand on bringing back the laundered money  from tax havens. But the laws in several countries stipulate that the names of the people involved in stashing away funds abroad should be revealed only after a proper inquiry was conducted and a prosecution case is charged against them. India also is against routing money into the country through tax havens taking advantage of the tax laws in these countries. But foreign investors especially foreign institutional investors (FIIs) and the countries having liberal tax regimes are against such changes.

Financial Sector: The US wants India to liberalize further its financial sector, particularly insurance and banking. The Bill introduced  in  Parliament for increasing the threshold  limit of the FDI in insurance is facing a lot of resistance from the left parties and also a group within the ruling party called RSS, the cultural wing of BJP. The public sector banks in India is dead against the demand of the foreign banks in India to expand their network. Presently, there is restriction on them  on the number of branches which they can open. The fear of the public sector banks is that once the multinational banks  are allowed to go into small towns and villages, they will be able to mop updeposits, at  their own cost. far in excess what  they  can.
Visa Issues: India wants a liberalized visa regime from the US to enable the large talent pool to take advantage of the emerging opportunities in the US. Apart from software and medical services, professionals  like advocates, nurses, technicians, architects, management consultants, financial experts etc. can get contracts - short or long -  in the US. This will help India to improve its services exports to increasingly offset the deficit in the merchandize trade. But the US insist on opening up the services sector in India. That would mean that legislation governing   professions like lawyers, chartered accountants, doctors, architects etc should be amended to allow foreign professionals to practice in India. A large segment of professionals across the board are against this  proposition
Totalization Agreement:. A closely linked up matter is the India's plea  for  early conclusion of the Totalization Agreement between the two countries, the negotiations for that has been going on for a long time. This would mean that social security tax need to be paid only in  one country. Now such tax is levied in both countries.   The US rules stipulate that the social security tax has to be paid by any employee the moment he starts working there. But the benefits of the tax, such as unemployment or old age pension, medical expenses etc can be availed only when the employee works in the US for a minimum period of 10 years. Most of the Indian IT &ITeS employees work there for lesser duration  and they forfeit their contributions. Unofficial estimates, put this figure around US dollar one billion a year. Conclusion of the Totalization Agreement will help these employees and their employers save a lot of money since they will be expected to pay tax only in one place.                            

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From Shell Shocked to Shell Delighted

  Business Economics & Services Team (BEST)


                                            From Shell Shocked to Shell Delighted

The Bombay High Court decision on Shell -the US based oil major -should signal the right vibes to the foreign investors, who were agitated  against the  dilly dallying  of the government in the Vodafone case. Many tax experts feel that the case is a standalone  one and facts are different from   Vodofone, though both cases are related to transfer pricing.   But quite a number of people that BEST has talked to maintain that the case reinforces the Supreme Court judgement on Vodofone and may have some impact on the government thinking in this matter. In Vodofone case, the Revenue Department wanted to seek further legislative measures to over look the apex court's decision.  
The facts of the case in brief are the following. Shell India markets  Pvt Ltd issued 867 million shares to the overseas group   company, Shell Gas BV in March in March 2009 at a face value of Rs 10 per share. The IT department challenged the transaction arguing that the share price could have been Rs 183 per share and accordingly valued  the transferred share at Rs 18,220 crore and the taxable income was pegged at Rs 15,000 crore for the year 2008-9, which was subsequently raised by another Rs 3000.  It may be noted that the Shell's total investment in India, through its   subsidiary Shell India Markets Pvt Limited is only US$ 160 million, which is less than Rs 1000 crore.
The case was decided on the basis of implications of the transfer pricing mechanism, which is being increasingly addressed by the Indian Revenue department and the courts. Transfer pricing is the price at which a company sells its products to the parent or subsidiary company overseas. There is the principle  of arms' length price, which in simple terms means that price of goods and services at which  the company sells to its parent or group company should be equivalent  to the price chargeable from a third party for the same goods or services.
The Revenue  department claims that with liberalization, there has been increasing incidence of over invoicing or under invoicing prices  which leads to considerable revenue loss. They have been approaching courts and legislative wings to plug the loopholes so that it may not lead to any revenue loss.

The Bombay High Court's ruling clearly says that transfer of shares will not amount to sale of goods and services and do not attract taxes under transfer pricing. Shell will be naturally happy about the decision and will be happy under the new dispensation to channelize more investment  into India. Interestingly, there may be several companies, which must have sold the shares to the parent or group companies abroad and the same ruling will be applicable to them.
Everyone is waiting in bathed breadth what would be the reaction of the Revenue department. The department can file an SLP in the Supreme Court  for quashing the order of the Bombay High Court. But the government has not still taken a view on the Vodofone case. In the last Budget, the Finance Minister had set up an empowered committee to look into the matter and the report of the committee is awaited. The tax experts feel that the next step of the government will grossly influence  the decision it is going to  take in the Vodofone case.       

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Rate Cut, Black Money and Kisan Vikas Patra

Business Economics & Services Team (BEST)



                                   Rate Cut, Black Money and Kisan Vikas Patra

Is RBI governor Rajan becoming more important than the Finance Minister? Going by the financial paper reports in India, one may get that feel. Everyone-from corporate honchos to economists-known and unknown-are clamoring for an early interest rate cut. Even the finance minister has joined the bandwagon of expanding number of people arguing for a rate cut. There is nothing wrong in the finance minster putting pressure on the RBI governor.  That has been the practice in India since monetary policy falls in the exclusive realm of the RBI, where RBI's diktat is the last word. Many finance ministers, including the immediate past one, tried to transgress into the exclusive territory of the RBI. Some have succeeded and others have failed, sometimes miserably, depending on astuteness of teh RBI governor. 
While the decision of the RBI governor will come out only by the first week of December, the nation is waiting in bated breadth the decision, if one has to believe the newspapers. I have a suggestion in this regard. The present prime minister is known for seeking the views of the people on a continuous basis. He had invitd the views of the citizens on the future of the planning commission and he had enabled even the lowly government servant send their sincere views and suggestions on making the governance apparatus more effective. Why not he seeks the opinion of the people  on the interest rate also?

I will not be surprised if a sizable number of people opine against a rate cut. it is not the price alone. Whatever statistics the government wants the public to believe, only the rate of increase of the prices have come down and not the  absolute prices, except for some seasonal vegetables. Most ideally, the government should have come out prices ruled last year for each commodity. That will nail the lies, which can be covered through statistical gimmicks.   
The oft repeated argument put forward by the protagonists of rate cut is that with lower interest rate, the citizens who availed home loans need to pay only lower EMIs. But does  the fiance minister know that such roll back of interest charged by the banks is done when the loanee moves an application to  the bank for switch over to the lower rate? For that, the loanee has to pay a one time fee. The banks keep on charging this fee every time the switch over takes place. For a person whose loan is close to Rs 20 lakh, the fee for rate conversion  will be upwards of Rs 5000. Sometimes, the switch over takes place several times during the pendency of the loan and aggregates to quite a tidy sum. Not that RBI or finance minister knows about it, but they turn a nelson's eye to such nefarious activities of the reputed banks.
Now about the black money. The G20 has endorsed the global efforts to eliminate the black money. Every participating country  has vouched to step up the drive towards the elimination of black money. India was an ardent supporter of the resolution. But what is happening on the ground is different. It is estimated that in India there is a parallel economy as big as the formal economy, if not bigger. That money is not necessarily stashed away abroad. It is floating in our economy in different forms and hues. Construction and building are the best avenues for pumping the black money. There are also agents who indulge in money laundering. Elections are fought on black money. Every one knows about it. There are allegations that  successive governments and political parties are using this conduit to the hilt during the election time. Despite the plain talks and threats, the judiciary   could do precious little for unearthing such money. The present case of  large number of accounts abroad  and cricket betting are pointers how very little had done on this count.
The other day, a well known lawyer  in one of the news channel opined that the black money holders abroad should be given amnesty and their nontaxable income should be chargeable to the highest rate applicable in the country. Then why a person, who had felled a jack fruit tree from a government compound for personal use in household should be punished with one year imprisonment and that too it had taken place some 40 years back.
The latest from the fiance minister is the launch of Kisan Vikas Patra, a certificate that the public can buy with tax exemption up to a prescribed level. The reason for the fanfare launch of the scheme is to give options to the investors who are crowding the space with investment in gold. That has necessitated a large quantum of gold imports, which will take away the buffer given to external resources on account of the easing of the oil prices.Does the government know that gold is a non merit good and  can impose steep tax on it to moderate its use.

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The Great Telecom War between India and the US

   Business Economics & Services Team


                             The Great Telecom War between India and the US

Electronica 2015 held recently in Germany has estimated that in 2015-16, the global electronics industry will grow by four percent to reach a trade volume of US$ 2.2 trillion, an all time high and will inch towards surpassing the global oil trade to become the most traded commodity in the world. Also, it estimates that the global electronics components trade, where India has considerable stake, will grow by US$ 547 billion.
In the meantime, India's General Budget  2014-15 proposed a customs duty of 10 percent on specified telecom gear, an item being imported mostly  from the US.
The US telecom majors contention is that once this tax is imposed, it will tantamount to India abrogating the WTO Information Technology Agreement (ITA)  since the said product comes under the purview of zero duty. There are many reasons that have been adduced by the US trade body -US-India Business Council  (USIBC) - to substantiate their contention. The foremost is that it will put the  digitizing drive in the back burner since the telecom gears are used for 3G and 4G systems. Secondly, the imposition of the  duty will further worsen the bottom lines of telecom majors, which are reeling under heavy debt burden. Third,it will adversely affect the flow of FDI into the country.
Interestingly, the US based telecom companies operating in India such as CISCO, AT&T, IBM, Apple, DELL etc. are unveiling plans to invest more in India. For instance, CISCO has announced its plan to invest US$ 1,7 billion this year. Though, there was scaling down in the  operations in IBM in certain segments, it is generally bullish about India. The present demand, industry insiders feel, is a proxy war to force the  Indian governments not to do anything that adversely affect their interest, when they are bullish on India on a long term basis.
The contention of the Indian electronics and telecom component manufacturers is equally sound. Many feel that the industry was not properly consulted when the Indian government had signed the ITA  to bring the customs duty to zero level. That was a jolt from the blue and many fledgling electronics and telecom companies had bitten the dust since  they could not withstand the onslaught of heavy imports. Domestic production was not at all profitable. Some companies survived with their hard work, innovation  and staying power. It is for the government to see that no further damage is done to the industry, going by the heavy  requirement of   electronics and telecom components for the country. They roll out statistics to prove their point. By 2020, India needs electronics goods worth  US$ 400 billion. The domestic production will be at best US$ 100 billion. The rest will have to be imported, creating huge imbalance in the country's balance  of payments postion. It is inevitable that the domestic production is encouraged to stem the outflow of resources.
The Department of Telecommunications (DOT) of India has a different version. It claims that the ITA has not been compromised since the 10 percent duty will be imposed on goods that are not covered under  that list. Of course, some of the items under  this category were not invented in 1997, when India signed the ITA in 1997, and came into operation in 2000.
The conflictual position is getting murkier with the US trade  body's plea that India should be prohibited from increasing the number of electronics items eligible for compulsory licensing, a power vested with the host country when it feels that certain goods in the national interest should be domestically manufactured and the license is accordingly granted.
Are we witnessing a war of attrition as that is being waged in the pharmaceutical  sector. Only time will tell that. One thing is clear that both countries have considerable stake in the game.
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Business Economics & Services Team


                                         Are We happy to Court CAD All the Time?

Do not go overboard to decipher what I meant by CAD. I have used the terminology to mean the obvious: Current Account Deficit. Many dub this as the single most disease afflicted on our economy: our imports exceed the exports and sometimes by leaps and bounds to cause consternation among the powers that may be. But at teh end of the day, we care two hoots as to how we get into that trap. Once discerned, I believe that it is the age old syndrome that the left hand does not know what the right hand is doing. 

I take only three goods to prove the point. One, telecom equipment and to be precise the mobile telephones, two-gold, for which the Indians have an insatiable appetite and the third and lesser known segment -equipment related to sexual wellness. Let me start of with the third and more exotic products-sexual wellness equipment. Let me narrate an incident that had happened years back. I was wandering through the crowded road in Calcutta (Kolkata). The name of the street I do not recall. It was just back on the erstwhile Great Eastern Hotel near Shakespeare Sarani, a crowded market there. One person sitting in a shop beckoned me to visit his shop, which was a very small and cramped up one. I went inside the shop and not many people were there except myself and the shopkeeper. He opened a drawer and show me a variety of sex gadgets, which I must say, was gender neutral. he told me that all those were imported and since it was not licensed import, they could not display to the public.
I am told that this business in India is now close to US$ 250-300 million that too a conservative estimate. Most of them are smuggled in to the country. Now most of the orders are transacted through the net and th delivery is safe either at home or at a place of your choice.
Secondly, again an electronic device-our expanding varieties of smart phones. Xiaomi smart phones are the latest craze and they are being sold through the net. China is raking huge resources through the import of this magical device. products are sold out within minutes of its launch, even in India where the Chinese imported goods are discounted in terms of its quality and durability. Despite the whopping trade deficit with China, which ir presently pegged at US$ 36 billion-Imports from China US$ 50 Billion and exports to China US$ 15 billion), the government seems to be unmindful about the trend, which has the potential to further jeopardize our external resources situation.
The third is the gold, which Indians horde or wear as nobody's business. Gold imports is substantial. The gold lobby may argue that most of the gold is for re-exports as jewellery or similar things. But the domestic consumption is also very high. Definitely, our households can do without much of gold even during marriages. The new generation shuns gold and getting decked up in gold ornaments during special days like marriage. But the power of advertisement and the cajoling by the jewelers are so strong that they get tempted to go for gold with little push from their conservative parents and relatives. Could we launch a movement to use gold minimally or totally eliminate it like Swatch Bharat. Of course, one has to overcome the lobbying tactics of gold and bullion dealers in Surat and other places.

Now coming back to mobile phone and sexual wellness equipment, I do not want to wear the hat of moral policeman. Those who want to use them , let them do that  freely. The more you suppress it, more the demand for smuggling and clandestine operations that can lead to revenue loss. But my point is encourage manufacture of these items domestically. When I say encourage, I mean that under the present law it is advantageous for a telecom giant to import equipment rather than manufacturing them domestically. It is on account of our skewed indirect tax laws, wherein the raw materials and intermediates that go into the manufacture of a final goods attract more customs duty than the finished prducts.   

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Capital Account Convertibility of Indian Rupee

 Business Economics & Services Team




                          Capital Account Convertibility of Indian Rupee

The other day, I heard somebody, who poses to be one in the knowledge of what the government is going to do telling that soon the government will announce a road map for moving towards capital account convertibility of the Indian rupee. I felt that term he used road map was in appropriate since the government, long back had taken some steps that could lead to capital account convertibility. To list them in sequence is not a problem. Long back in 1991, the government had announced the partial convertibility of rupee under the trade account enabling the exporters to park 50 per cent of their proceeds in foreign banks under intimation to RBI. Later, the government allowed floating of GDR, ADR and also   private placements  of foreign funds in the Indian companies etc, which was an incremental advancement towards capital account convertibility. 
Inflow of funds from Foreign Institutional Investors (FIIs) and PE route investments were another set of reform, which were aimed at revitalizing the Indian stock market. It is important to note that these investors can bring in and repatriate investment in dollar terms as and when they like. In a way, they enjoy convertibility of  rupee under capital account, which is denied to other segments of investors.

In between, there was another stage when the people where allowed to source dollar or any other convertible currency from the market for the purposes of education, tourism purposes and treatment etc. Earlier, such requests were to be managed by the RBI and one can get the foreign exchange only after RBI approved it. There were also ceilings imposed for release of foreign exchange.  . Removal of such restrictions can be termed as rupee becoming convertible under the current account.

Liberalizing lobby in India campaigned for capital account convertibility some 10 or 12 years back . They would have succeeded in their efforts but for what that had happened in Mexico and South eastern countries, which were  showcased  as models of economic reforms by the multilateral organizations like  IMF, World Bank etc. Riding back on the euphoria created by the foreign media, these countries had resorted to convertibility of their currency under capital account. Then onwards, the mayhem started. These economies were collapsed one after the other like a pack of cards. Many had written obituaries for these economies. That also helped the Indian administration to be more vigilant and to postpone the capital account convertibility.

It is important to examine what happened in the these countries. When the local currency became weaker, the citizens converted their assets into dollar denominated savings and investments. Local currency and assets had become valueless. Also, there were huge speculative syndromes, when people frely converted their assets from one currency to the other to take advantage of the speculation.   These countries also faced a massive current account deficit and had to be in ventilation for quite sometime. Thanks to some timely interventions from the multilateral organizations and more importantly due to their meticulous planning and tightening of belt,  economies had limped back to normalcy now. One advantage with them was that unlike India, theirs were smaller economies and the impleemtation of the plans were easier and faster.

Now coming back to the rumor. Harping on convertibility of  rupee  on capital account will  prove to be the most disastrous that the government can take at this stage. Our current account deficit is very high and at times can go out of bounds. One reason, the economic pundits, who support convertibility advocate is that India has sufficient foreign exchange reserves at any given point of time and even if there is massive flight of capital in the aftermath of  the convertibility, India will be able to hold the bull by the horn. This was also the reason adduced by the Mexico and South eastern countries at that of point  of time. We know what had happened to them 
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Sunset for Double Taxation Agreement Treaties

  Business Economics & Services Team


                            Sunset for Double Taxation Agreement Treaties?

Every successive government in India promises that they would look into the operation of Double Taxation Avoidance Treaties signed with more than 60 countries to enable the underlying assets to be taxed only in one country. That is fair and equitable, to say the least. Why then we have to have a re - look at those treaties? Here comes the catch. They are enablers to dodge taxes, through a process called round tripping. In plain language for money laundering. Billions of dollars are routed through tax havens like Mauritius, Cyprus, Malta etc. where tax exemptions are allowed liberally for investment in other countries, particularly India. The company wanting to take advantage of the facilities  of  tax advantage offered by these countries will have an office (mostly a post box address) and channelize  millions dollars meant for investment in a third country through these tax havens. The capital gains tax  in these countries are pegged at zero or at a very nominal rate , which is charged once the money invested by the FII is withdrawn from the host country. Since the money is taxed only in one country, the investors want their investment to come under  the tax regime of the havens. That way they escape the tax. 

How much money is saved by the investor in this matter? Let the facts speak for itself. In December 2012, the total investment of FIIs in India through Mauritius  was a whopping Rs 3,51,356 crore. Assuming that these investments in the stock market were withdrawn in 2013, the total capital gains tax payable in India will be the 30 percent of the profit made on the investment. In ordinary situation, the FIIs at the time  of withdrawal will make a profit of 30 to 40 percent on their capital. That means that they have to pay 30 percent tax on the appreciated amount. But  they  end up in paying zero taxes since they indicate their option to be taxed in Mauritius, where the tax rate is zero.
 Who is a loser in the game. It is the Indian revenue department. The Mauritius is only a conduit for chanlizing investment. No wealth is created there. Rather they stand to benefit since the entire economy revolves around the revenue they generate from the upstream and downstream processes of round tripping. These include registration fee for the shell companies incorporated, make shift offices set up in that country to establish their credentials, heavy travels into that country, bank charges, employment of the locals, rentals of the office premises, hotel bookings, other hospitality services like taxis, entertainment and what have you.

All tax havens have their own  reservations about streamlining their processes and bringing in transparencies in their operations. That is understandable because they have great stakes in such operations. Their economies may collapse once they are forced to toe in line. But why the Indian government is following a switch on switch off policy? Are they serious about implementing what they preach. Many have doubts about the government reaching the bottom of the case. Across the party lines, there is a strong nexus among politicians, business tycoons and bureaucrats. That is a strong nexus. It may take several years with the active involvement of upright politicians and officialdom to break that nexus. Sooner we do that, the better since the public is aware of  these skeletons in cupboard and there is a limit for their tolerance.  

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